Helping loved ones with their finances: the why and how of an unusually impactful opportunity

By Sam Anschell @ 2024-05-21T17:34 (+31)

Last summer, my late-60s parents asked me to help tidy up their investments and advise their giving over time. After ~150 hours of Googling, working with a financial advisor & an estate planner, and collecting thoughts from friends & finance-y EAs, we set up a plan that I feel good about. I shared our learnings with other family members of similar ages, and they made changes to their investments that I think will significantly increase their lifetime giving potential.

I am not a financial professional, and I strongly recommend that anyone consult with a professional before making changes to their investments. More information on how to hire a financial professional can be found in this section of the post. This post is specific to the US context.

I’m writing this post because:

• There is a lot of personal finance advice about how to start investing, but I couldn’t find much guidance about how to augment a suboptimal investment portfolio. A post like this one would have saved me a lot of time, were it available when I started this process.
  • Though my experience was more like a minimal-trust investigation, I suspect that someone who understood relevant tax laws and had a clear vision from the outset of the process could achieve 80% of the potential gains in ~10 hours. 
    • I estimate that for many middle or upper-middle class Americans, this translates to thousands or tens of thousands of dollars per hour.
       
• I suspect there is huge inaction bias when it comes to modifying or helping others to modify investments.
  • My guess is that due to taxes and fees, the average investor in their 80s may earn only ~60% of what they could have if they’d taken action to rearrange their investments in their 60s.
  • Some of this may stem from taboos and ugh fields around money, some of this may stem from status quo bias and the common propensity to compare investment performance to a savings account rather than an equity index. 
     
• I suspect that many high-functioning people have significant inefficiencies in their investments.
  • I think this may be particularly true for investors who started 20+ years ago, when low-cost index investing and other personal finance best practices were less mainstream. 
  • It also may be true for those who inherited investments. Grief can cause inheritors to deprioritize financial decisions, and sentiment may have made them averse to changing the testator’s investments. 

Tl;dr - Actions that seem broadly helpful

• Developing a strong information security plan for sensitive financial information.
  • Here is a checklist you may find helpful. The essentials (imo) are a secure password manager with unique and long passwords, physical security keys for two-factor authentication, and a safe or safe deposit box for sensitive physical items.
     
• For most people, it seems like a good idea to just sell all dispreferred assets in tax-protected accounts (IRAs, 401ks, HSAs, DAFs, etc.) without withdrawing money from those tax-protected accounts^[1], then reinvest the liquidated money from the sale into preferred assets (e.g., low-cost ETFs). Taxable events are not triggered by changing investments within tax-protected accounts.
   
• If a loved one passes (even if they are married to a surviving spouse), this is often the most opportune time to evaluate their finances and sell off investments because all investments are stepped up in cost basis on the day of death (meaning that any taxable unrealized capital gains are wiped off). ^[2] [3]
   
• For investments that aren’t in tax-protected accounts, you can explore this tool I created to think about whether to keep or sell each investment. ^[4]
  • Note that the same investment can have different “lots”, or cost bases across a variety of acquisition dates (e.g. when dividends are reinvested). It’s important to evaluate each lot independently - more on lots in this section of the post. 
  • Be careful before selling any mutual fund shares at “average cost basis method”. This locks you out of your future option to sell specific shares.
  • Vanguard has a user-friendly interface for choosing specific lots and helpful customer support. If other brokerages don’t, it may be worth porting over investments to Vanguard at the outset to simplify the rest of the process. 
     
• Depending on the size of your loved one’s investment account, consider hiring a financial planner for a few hours of fee-for-service advising (not an ongoing service that costs a material percentage of assets under management). 
  • Though everyone’s financial circumstances are different, I think erring on the side of collecting views from professionals (and financially savvy trusted friends/family) before taking irreversible action is wise.
     
• Diligence what type of will is best suited to your loved one’s situation, and strongly consider hiring an estate planner.
  • I’ve heard that attorneys with a WealthCounsel membership^[5] are more likely to specialize in estate planning and have up-to-date information about estate planning laws. 
     
• For any new money your loved one invests, you can recommend they follow traditional best practices:
  • This includes maxing out tax-exempt accounts like 401ks and IRAs before investing in taxable accounts.
  • For loved ones you are concerned may not have enough saved for retirement, I recommend this guide.

In this post I write about:

• My understanding of the current relevant laws around personal finance as they relate to modifying existing investments.
• How I thought about the cost of ownership and expected returns of investments in taxable accounts.
• How to find a financial advisor and estate tax professional.
  • What questions you may want to ask them.
• How my parents and I operationalized a financial plan.

I’m sure I’m missing a lot of important material on this topic. For example, I haven’t looked into the laws and considerations for gifting property (either to charity or to an heir). I would appreciate it if readers leave comments to enhance this post and help others use their resources to do more good.

To close this preamble, I just want to recognize that this process can be overwhelming. You may have circumstance-specific questions not covered by online resources - that’s perfectly normal. The upside of improving (even if not perfectly optimizing) loved ones’ investments is potentially so high, and the cost of reaching out is so low, that I highly encourage you to consider it. Had I thought to do this ten years ago, my family members likely would have been able to save dozens of additional lives through their giving - in this sense, the stakes of inaction couldn’t be higher.

Relevant laws for loved ones’ finances

Here is a non-exhaustive list of rules and regulations that may affect decision-making around portfolio changes in taxable accounts. I would highly recommend speaking to a financial professional about these and other laws that may apply to your situation:

• Investments are stepped up in cost basis when the assetholder dies, even if they are married to a living spouse.
  • This makes the time immediately after death especially effective to sell any dispreferred assets, because all unrealized capital gains have been wiped clean.
     
• The federal tax-free gift threshold reporting requirement is $18,000 per person in 2024. Giving another individual more than $18,000 in a year does not trigger a taxable event, but does need to be reported because the excess will count against the giver’s lifetime exclusion limit (currently $13.6M but reverting to ~$5M in 2026). 
  • The lifetime exclusion is also the amount of money someone can pass on from their estate at the time of death without triggering estate tax.
  • Some states also have separate thresholds for the bequest limits that trigger estate tax.
     
• Short-term capital gains (investments sold either by you or a mutual fund you own that have been held for less than one year), and nonqualified dividends (those issued by investments held for fewer than 60 of the last 121 days) are taxed as ordinary income.
   
• Long-term capital gains affect your taxes in the following way: 
  • They will not push your ordinary income into a higher tax bracket. 
  • They are taxed at the following rates at the federal level in 2024:

• They may trigger state taxes: the treatment of long-term capital gains varies by state, so I recommend checking your local laws.
  • For example, in California, long-term capital gains are taxed by the state at the same level as ordinary income. In Washington state, where there is no state income tax, state long-term capital gains tax applies only  to filers with more than $262k in gains, and is set at a flat 7% rate.
    
     
• They will affect your adjusted gross income, which may cause Net Investment Income Tax, higher IRMAA payments, and an inability to contribute to a Roth IRA or other income-capped benefits/deductions/credits.
  • Net Investment Income Tax is an additional 3.8% federal tax on investment income once a single filer's modified gross adjusted income for the tax year is at least $200k or a joint filer’s MAGI is at least $250k.
  • IRMAA is the amount that Medicare beneficiaries pay for Medicare. If the filer has a modified gross adjusted income for the tax year at least $103k as a single filer or $206k as a joint filer, the individual will start paying more in Medicare payments.^[6]
     
• Wash Sale law: if an investor buys a security within 30 days before or after selling it (or buys a substantially identical security), any losses made from that sale cannot be counted against reported income.

Idiosyncrasies to my parents’ situation

My parents are happy to use a high variance strategy for their investments (e.g. all equities) if they can also ensure they have enough to retire on (e.g. by adjusting their approach if markets fall or if a big unforeseen expense comes up). They are agnostic as to when they donate to GiveWell (thinking that increases in the marginal cost to save a life roughly keeps pace with the nominal returns of the stock market).^[7]

My parents also have a uniquely strong preference for donating in cash rather than appreciated stock. They have access to a type of counterfactual donation match that is available only if they give in cash (though not literally physical bills). I expect this post will be relevant to readers whose family members do not share these idiosyncrasies. But in anticipation of questions like “why not set up a Donor Advised Fund?”, I wanted to open with this. 

On the donation tax-efficiency/counterfactual bonus side of things, here (1, 2, 3, 4) are a few EA forum posts that offer different strategies for increasing the impact of donations. The general principle that I expect would guide many donors is bunching donations and donating appreciated stock rather than cash. Exceptions to this may include: 

• If your loved ones’ employer offers a donation match that doesn’t work with appreciated stock.
• If the donations your loved ones want to make are not tax-exempt (e.g. a campaign contribution or a gift to a 501c4 political organization).
• If your loved one works at an org that they would like to donate to, and would prefer to pass up pay to maximize tax savings for both them and their employer.

Expected returns and cost of ownership for investments 

Why cleaning up investments early can be valuable

In my parents’ non-tax-protected account, they held a collection of actively managed mutual funds and individual stocks. Many of these mutual funds had expense ratios between .7% and 1.5% per year with capital gains distributions rates between 5% and 10% per year. As context, here are the US averages for mutual funds’ capital gains distributions as a percentage of net asset value between 2001 and 2021:

^[8]

Capital gains distributions are usually taxed at the state and federal long-term capital gains rate, so the cost of capital gains distributions depends on one’s income. Per a 2021 ICI report, the average expense ratio of actively managed mutual funds was .68%. 

Combining these effects, for a married couple living in California making $120,000/year here is how $10,000 would have performed in:

• A total stock market etf with no capital gains distributions tax and no expense ratio (which is roughly realistically possible),
• An actively managed mutual fund (also tracking the total stock market) with an average expense ratio and rate of capital gains distributions (with taxes subtracted from the portfolio balance each year),
• An actively managed total stock market mutual fund with twice the average expense ratio and rate of capital gains distributions,^[9]
• A TIPS-like investment that tracks inflation with no fees:

Here is the Visme link where you can see the values of each dot on the above graph and here is the sheet version.

The punchline numbers of what $10,000 invested in January 2001 would be worth in 2022 in the following funds are:

• Total stock market fund with no fees and no capital gains distributions: $54,300.
• Example fund with average actively managed expense ratio and capital gains distributions: $33,625.
• Example fund with 2x average actively managed expense ratio and capital gains distributions: $20,567.
• Inflation-adjusted value of $10,000: $16,534.

This is a big difference - money invested in a no-expense, no capital gains distributions ETF would have grown by an additional 60%^[10] more than money invested in actively managed mutual funds with the US average expense ratio and capital gains distributions. Because of this, I wanted to convert as many actively managed mutual funds into target ETFs as possible, balanced against the tax incidence this would bear. A clean version of this looks like selling offsetting pairs of investments that have equal amounts of appreciation and depreciation. 

(Un)fortunately, mutual funds that have been invested in the market for decades generally go up in value, so the amount of depreciated investments in my parents’ account had depreciated by less than the dispreferred appreciated investments had appreciated. This means that we needed to make tradeoffs between selling some investments at a capital gain and having a higher tax bill this year, or holding those investments and paying taxes and fees over time. Here is a tool I created to help make sense of this tradeoff. 

Other ways of offloading dispreferred investments include donating appreciated stock or transferring appreciated stock to a tax-exempt entity like a donor advised fund or charitable remainder trust.

Assorted Learnings:

• It is fairly common for a given investment to contain multiple “lots”. Each lot represents a group of shares that were acquired at the same time and thus have the same cost basis. But in the cost basis summary of an investment, you’ll see the average cost basis of all lots. Here is an example of how Vanguard displays the cost basis summary of Boeing stock:

^[11]

From this information, it looks sensible to hold this Boeing stock. Boeing is a blue chip company that probably has similar expected returns to the total stock market, and our investment has appreciated 264% so eating these long-term cap gains would be pretty brutal. But by checking lot details, we see the full story:

Of these 116 Boeing shares, 100 have appreciated by 866%, eight have appreciated by 9-39%, and eight have depreciated by 8-62%. If we were looking to sell shares of Boeing and realize some long-term capital losses, we could simply set our cost basis method to SpecID and sell the specific eight shares that have depreciated.

A best practice is to investigate the unrealized capital gains and losses of each lot in your loved one’s taxable portfolio, not simply the average across lots. For stocks and ETFs with reinvested dividends, you may be able to find unrealized capital losses among these dividends (this was the case in the above Boeing example).

• Another best practice is to double and triple-check that trades have gone through. Small companies sometimes don’t have the trading volume to guarantee that market orders will find a buyer, and for some brokerages, you’ll need to call to confirm trades or ask the brokerage to manually remove the investment from your account to realize a capital loss.
  • Loved ones may forget to re-invest money after a sale is made, especially when selling mutual funds where trades only settle at the end of the business day. Be sure to follow up if your loved one doesn’t want to be sitting on cash in their brokerage!
     
• My family had investments spread across a variety of accounts, in such a way that it may be easy for them to forget about a brokerage later on. A meticulous tracking system is a must, but the ultimate failsafe is to port over investments to your primary brokerage.
  • Some brokerages like Invesco and Putnam have extra trading commissions, and/or restrictions around liquidating assets that make moving investments even more attractive.
  • You’ll likely need to call your main brokerage and ask them to submit an ACAT for an NSCC transfer to move the investments from the brokerage account you’re trying to close into your preferred brokerage. By default, a safe option can be to do this in kind and not request to trigger a sale or exchange of investments.
    • This might be a huge pain and require medallion signatures or take months to go through. In many circumstances this slog will be worth it. 
  • When transferring investments to a new brokerage, it’s possible that the cost basis information will get lost in translation. This might mean that all lots display the same cost basis when they shouldn’t, or it may mean that there is no cost basis information available.
    • You can get in touch with both brokerages to attempt to recover the cost basis information. Failing that, you can also make a good faith effort to self-report cost basis information (this is how all investors filed their taxes until ~20 years ago when brokerages started keeping their own records). 
       
• By making trades during trading hours (usually 9:30am-4:00pm EST) your loved ones may avoid paying larger bid-ask spreads to marketmakers.
   
• I highly recommend checking the specifics of a mutual fund’s holdings and fees before deciding to keep or sell it. Even a fund like “XYZ company S&P 500 index fund” can have:
  • High expense ratios.
  • Significant cash or cash-equivalent holdings.
    • A mutual fund makes money by keeping cash in its fund in the same way that a bank makes money through customer savings accounts: by reinvesting the cash holdings and passing on none of the returns to the fund/account holder.
  • Deferred load fees.

How to find a good Financial Advisor/CPA/Estate Planner at a reasonable price:

Unfortunately, many major brokerages no longer provide their customers with free financial advising. For example, Vanguard charges .3%^[12] of assets under management per year to provide professional tax and advising service. For many investors, it makes more sense to hire fee-for-service professionals than a “dedicated financial advisor” who charges a percentage of assets under management every year. I’d also recommend coming in with specific, well-scoped questions about how you want the advisor to use the time you’re paying for. This could just be “please review my current plans and catch any blind spots”. 

I found XY Planning Network to be the best resource for finding fee-for-service finance professionals. It’s a directory of CPAs and CFPs for hire that allows you to filter by expertise in the specific subdomain you want, and view hourly rates and reviews. I recommend working with professionals living in your state so that they’re aware of any state-specific laws that might apply to your situation.

In my opinion, most professionals aren’t going to be knowledgeable/competent in the areas you’re looking for help with. One approach to finding a good advisor is to send templated emails and conduct short interviews with people who are willing to have a free introductory call - here is a sample outreach email and set of interview questions to test competency. I ended up signing up for free informational calls with four professionals and hiring one of them for $1,500 to put together their recommendations for my parents. 

Once you do hire a finance professional, I recommend setting a very specific scope of work at the beginning of your engagement. Certain projects like estate planning have standardized deliverables, but for work with CFPs or CPAs you may want to outline a work plan - here is a sample scope of work. 

Word to the wise: Be aware of upselling when working with financial professionals. Some finance people may get a kickback even from products that aren’t directly affiliated with them or their company (e.g. “have you considered an annuity?”) and may not disclose those financial ties to you when making recommendations. Despite it being difficult to fully align incentives with finance professionals, I think they have a valuable perspective to add. If you’re ever unsure about their recommendations, you could always check with friends or ask for a second opinion. 

Thoughts on where to invest

Once again, I am not a financial expert and I am not trying to give you financial advice. I don’t have strong views on where to invest, but I do think it’s important to be skeptical of investment theses that deviate from conventional wisdom. I.e., the burden of proof should be on the nontraditional strategy to demonstrate why it is better than holding a low-cost, diversified portfolio. Choosing where to invest is a big call, and I think it’s wise to carefully construct a strategy that makes sense for your loved one.

Here’s an example of a way that one could be misled: mutual fund companies will “incubate” funds for their first few years of operation to “build up a track record”. In practice, this lets funds make the best-performing incubated funds public (performance mainly being driven by short-term variance rather than brilliant fund management). This can also skew how sectors appear to perform because sectors are represented by the funds that have continued to exist for, e.g., 10 years, not the funds that were around for one year and subsequently shut down. 

Here is a doc with a few links on historical returns by sector, large cap vs small cap, growth vs value, and a tool for testing merged approaches for anyone who wants to do their own research.

Ideas that were not a good fit for my parents but may be for others:

• Purchasing a life insurance policy in your estate’s name (in order to shrink the size of your taxable estate).
• Leveraged ETFs.
• Robo-advised funds
  • Tax loss harvesting funds.
  • Funds of funds like AVGE.
• Using prediction markets to form nuanced views on important questions (e.g. the likelihood that the step-up law is overturned in the next 10 years).
• Hiring red-teamers to make your decision-making more robust (e.g. posting bounties for people who are able to change your mind).

How my parents and I operationalized a financial plan

At the start of this project, my parents and I overhauled their information security. My parents worked with an estate planner to designate GiveWell as the beneficiary of their IRAs and establish a will that could transfer leftover money to their descendants or GiveWell at the time of my second parent’s passing.

Once my parents and I developed a firm understanding of relevant tax laws, felt confident in where we wanted to invest, and created a dynamic budget^[13] for their retirement, we took the following steps:

1. We consolidated the nine brokerages they had investments in down to two.
    
2. We sold 100% of the investments they had in their tax-protected retirement accounts and without moving money out of tax-protected accounts reinvested newly liquidated money in our preferred investments. 
    
3. We sold ~70% of their dispreferred investment lots from their taxable accounts and realized capital gains equivalent to ~3% of the value of those investments. My parents withdrew the money they plan to donate this year and reinvested the rest into low-cost ETFs (80% in VOO, 10% in VT, and 10% in VWO).^[14] 
   1. Of the 30% of dispreferred investments we did not sell, we plan to sell some in 2025. We are planning to hold onto other investments until one of my parents passes and the investments are stepped up in cost basis. We used this tool and set a breakeven cost of ownership threshold of 15 years or longer. If the step up law is later reformed, we’ll revisit these investments.

If you have questions after reading this post and are interested in setting up a call, feel free to schedule a time on my calendly. Again, I am not a financial professional so I will not be able to offer financial advice, but I’m happy to be a sounding board and recommend resources. 

Thanks for taking the time to engage with this post and for considering taking action with loved ones in your life. The process has brought me and my parents closer; I think financial security and the ability for a loved one to do more good with their life’s savings is one of the greatest gifts you can give.

1. ^{^}

   Within a tax-exempt account like a traditional or Roth IRA or 401k, you can sell assets in the account and reinvest the proceeds without forgoing the tax advantage so long as you do not transfer money from within the account to outside of the account. As soon as you transfer money to e.g. your bank account, that money loses its preferred tax treatment and you are not able to transfer it back to the tax-exempt account beyond the annual limits (e.g. $7,000/year in 2024 for IRA contributions among people under 50).

2. ^{^}

   E.g. If the loved one had a stock that had appreciated by 20% and sold it the day before their death, they would owe capital gains tax on that 20% appreciation. If their spouse sold the stock the day after their death, the spouse would not owe capital gains. The holding period for inherited investments is automatically considered to be more than one year, so the inheritor will always pay capital gains on any appreciation at the long-term cap gains rate (e.g. if they don’t get around to selling the asset for a few months after inheritance).

3. ^{^}

   Avoiding a “step down in basis” (the inverse scenario where a passing loved one holds investments with unrealized capital losses) is more complex and may not have an elegant solution. Your loved one may want to sell off unrealized capital losses well in advance of their passing whenever they are able to write these losses off against capital gains. 

4. ^{^}

   For many people, transferring money they intend to donate into a Donor Advised Fund can be sensible because taxes from ownership in a taxable account such as capital gains distributions and dividends can exceed DAF fees even for buy-and-hold investors. However, retirees may not know how much they can donate throughout the rest of their life given uncertain costs such as long-term care or market crashes. Because of this, I think this tool is worth exploring even for DAF-holders.

5. ^{^}

   A costly estate planning software subscription for finance professionals that isn’t really worth paying for unless a significant share of their work is spent on estate planning.

6. ^{^}

   These higher rates fully kick in at different income thresholds (i.e. it's better to have a $205,999 MAGI than $206,000 as a joint filer, because $206k would automatically cost you an additional $1,677). In practice, it can be hard to forecast your MAGI because for older investors it can depend largely on investment income, which is highly variable. Assuming you have no ability to predict, this works out to be functionally around a 2.2% additional tax on capital gains of one spouse qualifies for Medicare and a 4.4% additional tax on capital gains if both spouses qualify for Medicare.

7. ^{^}

   I recognize that this is my parents’ idiosyncratic preference, not a fundamental law of nature. Much has been written about giving now vs giving later - here’s the EA forum archive on donation timing.

8. ^{^}

   Source: Russell Investments blog.

9. ^{^}

   I used this historical stock market calculator. For the first year (2001), I calculated the average capital gains distribution and expense ratio example by multiplying the 4% capital gains rate of capital gains distributions from the above graph by 24.3% (15% long-term capital gains tax rate + 9.3% California state long-term cap gains rate for joint filers making $120,000) to get .972% in capital gains distributions costs. 
   
   Then I added .68% in expense ratio costs to get 1.652% in overall costs. Then I multiplied the 11200 value of investing $10k from the historical stock market calculator from Jan 2001 to Jan 2002 by 1.652% and subtracted the product from $11200 to get $11,014. From 2002-2003, I plugged in $11,014 as my starting value, rather than $11,200 to account for compounding returns. 

10. ^{^}

    This is likely an underestimate, because an unmodeled cost here is dividend yield percentage (the percentage of an asset’s value paid out as a taxable dividend). Fee-conscious ETFs and index funds tend to have low dividend yield percentages, whereas actively managed funds tend to have higher dividend yield percentages. Even disregarding taxes and fees, the total stock market tends to return more than most actively managed funds due to broader exposure to the best performing stocks. This is also an underestimate for investors with higher adjusted gross incomes, who would have additional taxes on their capital gains distributions like Net Investment Income tax, higher IRMAA payments, higher state cap gains rates, and more.

11. ^{^}

    Note: my parents reviewed a draft of this post and approved of its publishing.

12. ^{^}

    Vanguard told me that the process of unenrolling in its financial advising program takes months, so signing up for this service with the intention of dropping it a few days later is unfortunately not as enticing as it may seem. 

13. ^{^}

    I.e. “Here's our plan for lifetime giving and investing right now, and here’s how we’ll adjust our plan based on changes in circumstances (e.g. market downturns and a potential need for long-term care coverage)”.

14. ^{^}

    A nice feature of holding a few different types of semi-uncorrelated holdings for my parents is that when they sell off investments to donate in the future, they’ll have a few options to choose between to reduce expected capital gains.